A corporation is the first business entity type established to provide limited liability for its owners. However, the limited liability that a corporation provides comes at a cost (double taxation) that many business owners avoid by choosing a much newer business entity type called a Limited Liability Company (LLC).
An LLC provides its owners with personal liability protection, like a corporation, but with the pass-through tax benefits of a sole proprietorship or partnership. Because of this, the LLC has become the vehicle of choice for business owners and investors who desire personal liability protection, but without the drawbacks of corporate taxation.
Texas is one of the few states that allow the formation of an LLC that, when the right language is included in its Certificate of Formation, enables its owners to create multiple sub-series under a single LLC structure. This is referred to as a Series LLC.
Unlike a traditional LLC (which owns its assets in a single pool), a Series LLC enables its owners to hold multiple properties in separate, insulated sub-series—sub-series A, sub-series B, and so forth. The assets and liabilities of each sub-series are confined to that sub-series only and are segregated from the assets and liabilities of other sub-series.
So, if there is a lawsuit or a foreclosure that affects the property in sub-series A, the other sub-series (sub-series B, sub-series C, and so forth) are not affected or liable for the outcome. This is why the Series LLC is popular with real estate investors and those who own many different types of investments.
Apart from its ability to create multiple sub-series underneath the parent LLC, a Series LLC has the same characteristics as any other Texas LLC, including its tax options. That means a Series LLC can be taxed as either a disregarded entity like a sole proprietorship or partnership, a C-corporation, or an S-corporation.
LLCs are required to file their own annual federal income tax return unless it is treated as a disregarded entity for federal income tax purposes. A disregarded entity is an entity that is not considered separate from its owner for federal income tax purposes.
Single-member LLCs are disregarded entities by default, while multi-member LLCs are taxed as partnerships by default. In cases where a natural person (a Form 1040 filer) is the sole member of an LLC, the profits and losses of the disregarded entity are reported on the taxpayer’s Form 1040—Schedule C.
In Texas, which is a community property state, married couples who wholly own an LLC as community property can be treated as either a sole proprietorship or a partnership for federal tax purposes.
Otherwise, a single-member LLC may elect to be treated as a C-corporation, in which case the entity would need to file Form 1120. A single-member LLC may also elect to be treated as an S-corporation, in which case, it would need to file Form 1120S.
Likewise, a multi-member LLC may also elect to be treated as a C-corporation or S-corporation. However, unless there is a compelling business reason for a multi-member Series LLC to elect C-corporation treatment, in most cases, it should refrain from doing so.
If a sub-series that belongs to a Series LLC has:
Then a separate annual federal income tax return may be best, but is not required. The IRS will treat each individual sub-series as a separate LLC—each of which may elect pass-through tax treatment if the established criteria are met.
Texas does not impose a tax on the income an LLC generates. However, it does require an LLC to pay an annual Franchise Tax.
This Franchise Tax must be paid annually to the Texas Comptroller of Public Accounts (CPA) between January 1 and May 15th, along with a Public Information Report (Form 05-102) that lists the names and addresses of the LLC's managers, officers, and directors.
However, your LLC may be exempt from the annual Franchise Tax if its total gross revenue was less than $1,130,000. But, you will still be required to file a No Tax Due Report (Form 05-163).
For more detailed information regarding the taxation of a Texas Series LLC, consult with an experienced Texas business law attorney. Call us today to arrange a free consultation.